Abstract

In this paper we extend earlier work on the economics of shallow lakes by M\"aler,
Xepapadeas and de Zeeuw (2003) to the case where two communities have
incommensurable preferences about lake eutrophication. In the case of incommensurable
preferences interest group behavior arises, we therefore consider the case where society is
divided into two interest groups and is thus unable to agree on a single management
objective. In particular, the communities that share the use of the lake disagree on the
relative importance of the shallow lake acting as a waste sink for phosphorus run-off as
opposed to other ecosystem services. A dynamic game in which communities maximize
their use of the lake results in a Nash equilibrium where the lake is in a eutrophic state
when in fact the Pareto optimum would be for the lake to be in an oligotrophic state. Our
paper differs from previous work by considering two communities or interest groups with
different preferences for environmental services. The tax that would induce, in a noncooperative
context, all of society's members to behave in such a way as to achieve a
Pareto optimal outcome is derived under the assumption that a social planner does not
favor one community or another. We then ask whether or not such a tax rate would in fact
be implemented if each community were able to bear political pressure on the social
planner and the social planner were a public representative seeking re-election. In this
case both types of communities lobby to have their preferred level of tax applied based
on their relative preferences for a clean lake and phosphorus loading. The effects of the
lobbying on the application of the optimal tax are investigated numerically for particular
values of relative preferences and the relative size of each group. The representative
seeking election proposes a different tax rate in order to maximize their probability of
electoral success. This problem is solved numerically assuming that the lake is in a
eutrophic equilibrium. It is shown that political representatives have an incentive to
propose tax rates that are insufficient to achieve a return to an oligotrophic steady-state

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